A better way to make billions as Chinese companies look abroad

One prominent trend is that Chinese companies are keen to explore overseas markets.

China’s fast economic growth is over. The government has been talking about stimulating the economy for three months — with few actions to follow through. Meanwhile, stock moves have been so sharp and volatile that by the time foreign investors figure out what’s going on and decide to buy into the rally, chances are they will be left holding the bag. The era of making easy money from China seems behind us.

Nonetheless, the country’s sheer scale and prominence in the global supply chain means economic dynamics there can affect investment portfolios that don’t have direct exposure. What happens in China doesn’t just stay in China.

One prominent lasting trend is that Chinese companies are keen to explore overseas markets, where they see higher profit margins. However, by running away from nagging deflation and fierce competition at home, they can become disruptive forces in developed economies, posing existential threats to some while creating unexpected windfalls for a few others.

Temu’s entry into the US showcases just that. Two years after the launch, the low-cost e-commerce firm is already reshaping America’s retail landscape. Discount stores are struggling, as Temu, which attracts shoppers willing to trade longer shipping times for rock-bottom prices, grabs market share. Even the almighty Amazon.com Inc. dares not sit idly by, launching a new online storefront last month to compete with PDD Holdings Inc.’s overseas shopping platform. On the other hand, Temu has spent billions of dollars advertising on Facebook, benefiting parent Meta Platforms Inc.

While Amazon’s share price has been resilient — its cloud services accounted for 60% of profit last quarter  — investors who bet against traditional retailers would have come off handsomely. US-based Dollar General Corp. and Dollar Tree Inc., the two biggest players in discount stores, are down about 45% and 51% for the year.

The car industry tells a similar tale. Not only has China become the world’s largest auto market, selling more electric vehicles than any other country, it’s reshaping consumer tastes even in the high-margin luxury segment. Digital experiences that Chinese companies Nio Inc. and Xpeng Inc. excel at, such as drop-down cinema screens and smooth voice controls, are becoming as important to drivers as traditional metrics like horsepower. As a result, European automakers, in the slow lane in their digital shifts, are struggling. BMW AG, Aston Martin Lagonda Global Holdings Plc, and Porsche’s parent Volkswagen AG have all warned of weak profits this year.

Even with Donald Trump returning to the White House, this trend won’t stop. As US consumers go from resilient to resourceful, comparing prices and looking for deals, Chinese brands’ value-for-money proposition can resonate. The profit is too good to pass. For instance, at budget lifestyle chain Miniso Group Holding Ltd., North America and Europe contributed to about 12% of revenue despite having only 7% of total store count. As such, to tap into a more benign and lucrative market, Chinese firms are willing to uproot themselves, hiring local labour to please protectionist governments.

No doubt, China is entering a middle-income trap, and sell-side banks have become cautious. Goldman Sachs Group Inc., for instance, argues that timing matters. It pointed out that Japan’s stock market had seven substantial rallies during its nearly three-decade bear market, a sign that attractive investment opportunities can coexist with a challenging macro backdrop. Meanwhile, JPMorgan Chase & Co. is looking for narrower pods of opportunities, and likes Chinese housing services firm KE Holdings Inc. as secondary transactions in China are rising, as well as NetEase Inc. because of the government’s faster approval of online games.

But these are not secular trends. Rather, one should perhaps look at stocks listed in the US and Europe, and think about the global ramifications of China Inc. going abroad. This is a lasting story that is still being played out.

Credit: Bloomberg